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May 4, 2013

How to Protect Clients From Strippers and Cabana Boys

The need for prenuptial agreements is real, and advisors are the first line of defense

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“Most people think 50% of marriages end in divorce,” Basel Jamra said at the outset of his Saturday afternoon breakout session at FPA Retreat 2013 in Palm Springs, Calif. “It’s actually 60% for first marriages and 65% to 70% for second and third marriages.”

Pre-nups, he related to the advisors in the audience, “are no different than other forms of hedges you use for your clients.”

His partner in the law firm of Jamra and Jamra, Grace Jamra, noted that courts have complete discretion in forcing clients to liquidate in order to fund and/or settle divorce proceedings, which is a reason pre-nups are so important.

Who needs a pre-nup? “Anyone who wants to avoid the unintended and unforeseen liquidation of assets due to a divorce and anyone who wants to avoid a protracted divorce proceeding,” Basel said. “This means many of your clients, and we rely on your help when putting them together.”

Pre-nups are especially important for anyone with assets prior to marriage or anyone coming into an inheritance at some later date.

“Two 18-year-old high school sweethearts with no assets that want to build a life together probably aren’t candidates for a pre-nup,” he added.

The duo related the case of a client who inherited $7 million when his father died suddenly. The client was in his late 20s and was marrying someone who was also in their late 20s. He made about $80,000 a year and she did well as a lawyer, with income of $300,000 a year, although she had no assets.

“He told his financial advisor he wanted to take his father's inheritance, buy a house, start a business and make capital improvements to both,” Grace said. “That was a huge red flag; by all accounts the inheritance was a separate asset, to be treated as such. But what happens with the improvements and appreciation?”

They were able to structure it so that any earned income would be joint property, but the home, business and value of the capital improvements “were not to be touched.”

“Although he was in his 20s, he did it right,” Basel said. “He could have taken a left turn, gone down the street to a strip club, married a dancer named Destiny and woke up five years later wondering what happened.”

Pre-nuptial agreements, she said, "provide guarantees, because once divorce proceedings start, there are no guarantees. The judge could wake up on the wrong side of the bed that day and even though you’re right, you lose.”

Lay people don’t understand that not everything is split up 50-50 in a divorce, she said, and it could be a dangerous assumption that could cost them a lot in the end. Advisors need to realize their clients have options—that is, prior to marriage.

“We had another client who was getting remarried after going through a divorce,” Basel concluded. “He didn’t want to go down that divorce road again, so he was able to say that everything was separate property and was off limits to divorce proceedings. In exchange for that, she would get a lump sum amount for every year they were married. So there are many different ways it can be structured.”